The Federal Open Market Committee, through its purchases of dollar-denominated assets, has been steadily injecting liquidity into the U.S. economy. The process (known as quantitative easing) increases the U.S. money supply, allowing financial institutions to boost reserves and the U.S. government to borrow (and repay external debts) in a debased currency. In essence, the U.S. economy is "lending" itself money by creating more.

The U.S. financial system has become sickeningly anti-capitalistic -- rewarding the most productive members of institutions that produce negative economic utility. In other words, we continually reward the most destructive members of our society.

Monetary Policy a "Race to the Bottom"

During the height of the U.S. property/equity bubble, honest bankers may have knowingly issued bad loans as a last-ditch effort to stay competitive in an irresponsible business environment.

Of course, as more countries engage in this "competitive devaluation," the less (intended) impact it will have (with greater potential for unforeseen consequences and societal costs).

Investment Policy in a Manipulated Market

Determining an intelligent investment policy in a manipulated market is a challenging, if not impossible task. Nevertheless, let us attempt to construct a policy with consideration of the following points:

On a relative basis, U.S. stocks are far more attractive than U.S. bonds. The earnings yield of the S&P 500 (using 10-year trailing data), stands at 4.73%. Comparing this to the 2.40% yield on a 10-year U.S. Treasury note and the 3.71% yield on a 30-year U.S. Treasury bond -- equities possess a comfortable margin of safety in the medium and long term. While stocks may outperform on a nominal basis, this outperformance may not exceed the rate of devaluation in the U.S. dollar (resulting in paper gains, with an actual loss of purchasing power).

Fear of an increased money supply has driven gold to record prices (priced in U.S. dollars). Other precious metals, and their respective ETFs, have followed a similar trajectory.

An increase in M3 (the broadest measure of money supply) will not immediately increase consumer price inflation.

Global equity markets remain susceptible to manipulation and volatility, as a result of algorithmic trading.

Considering the near-2:1 yield differential between U.S. equities and medium-term debt, investors may wish to allocate their portfolios in a similar proportion. Perhaps 50% stocks and 25% bonds. Holding cash during a period of currency debasement may seem counterintuitive, but an allocation of 15% cash may offer opportunities to capitalize on market volatility and mispricings. Lastly, investors may wish to hold 10% of their portfolio in a hard asset, such as gold, as a form of "insurance" policy against a prolonged debasement of paper currencies. Now, let us expand our conclusions:

Stocks should be purchased only on the basis of attractive absolute valuations. The investor may wish to focus on large corporations with diverse global sales (in essence, diversifying the investor against specific currency risk). Exxon Mobil (XOM), Coca-Cola (KO), and Johnson & Johnson (JNJ) fit these criteria.

Corporate bonds should be avoided, unless they can be purchased at a distressed valuation and have a sufficient revenue-to-debt coverage ratio. The current yield differential between corporate debt and U.S. does not compensate for the fact that governments can print money; corporations cannot.

As a final thought, perhaps we should reconsider why a Congress member is elected every two years, our president is elected every four, a senator is elected every six years -- but a Federal Reserve governor is appointed every 14 years.